news Corporate Croatia by pengxiuhui


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Croatia is pushing its way onto the world investment map. A new       investment advisers Auctor, has been in Croatia since shortly after
generation of business-friendly politicians with a focus on cutting   it became independent from the former Yugoslavia, and has wit-
red tape, investing in the country’s infrastructure and stepping up   nessed this transformation process first hand.
the race to join the European Union is moving Croatia into the              “It was a difficult time in the early years,” Glazer recalls. “Peo-
spotlight for foreign investors.                                      ple did not start to change psychologically until 2002 or 2003. There
      Early indicators of the economic impact of the improved busi-   was a lot of tragedy and displacement. Now things are really mov-
ness environment are promising: GDP growth rose 4.8% in 2006,         ing along very quickly, in terms of regulatory change and in terms of
up from 3.8% in 2004 and 4.3% in 2005. Figures for the first          institutional change, and I think Croatia’s got a bright future.”
quarter of 2007 show a dramatic improvement over the same peri-             The road ahead for Croatia is not without its challenges.
od last year. Net inflows from FDI rose to 7.8% of GDP in 2006,       Unlike some of its neighbors, this cosmopolitan but small country
and unemployment, although still in double digits, has fallen to a    of 4.5 million inhabitants does not have a large supply of low
ten year low. This growth has been accompanied by economic sta-       priced labor or a huge domestic market, and high state spending
bility, with inflation a little over 2% for the first few months of   means that its tax levels are relatively uncompetitive. Croatia’s two
2007, the kuna steady against the euro, and stable credit ratings     main assets are the high quality of its workforce and its geograph-
from the main agencies.                                               ical location, halfway between the developed markets of Western
      US investor Michael Glazer, director of leading brokerage and   Europe and the fast growing Southeast.
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Corporate Croatia
                                                                                Sanader’s government is extending the country’s education sys-
                                                                          tem, making eleven or twelve years of education compulsory, up

It is the productivity and quality of Croatia’s workforce that will be    from the previous eight years, and in the 2007 budget, the Ministry
key to the future success of the strategy to kick start private sector    of Education earned the biggest increase. Spending in R&D is
growth and attract foreign investors to value-added businesses.           already high by regional standards, at around 1.1% of GDP accord-
Good quality labor will make Croatia more competitive and, unsur-         ing to the European Commission, and the government is putting
prisingly, education is one of the main areas of reform for the center-   renewed emphasis on adult education and lifelong learning.
right government of Prime Minister Ivo Sanader.                                 “Croatia does have an educated work force and has an impor-
       “In order to be competitive against the much stronger              tant information/technology sector,” Robert Bradtke, US Ambas-
economies of Europe, we believe that our main asset will be a             sador to Croatia, says. “I think this country has the human poten-
knowledge-based society,” Sanader says. “There are a lot of               tial, the human capital.”
investors who are asking for a specialized and skilled workforce.               In the immediate aftermath of war, early Croatian govern-
We are preparing programs in response to the requests of the busi-        ments focused on state building and on internal issues. The more
ness community.”                                                          outward-looking government of Ivo Sanader, which is targeting EU
                                                                          membership in 2009, has made long overdue economic reform a
                                                                          priority, and Croatia is now catching up with its competitors. In the
                                                                          2006 Global Competitiveness Index of the World Economic Forum,
                                                                          Croatia jumped from 64th to 51st place, ahead of EU members Bul-
                                                                          garia and Romania, and just behind Poland at 48. In terms of busi-
                                                                          ness competitiveness, Croatia rose by nine places to 56.
                                                                                The Forum’s report confirms some of the current strengths and
                                                                          weaknesses of the Croatian economy: it scored well on the human
                                                                          capital side, for higher education and training, and for technological
                                                                          readiness, but its performance was lower than average in terms of
                                                                          macro economy, market efficiency, and institutions.
                                                                                It is this imbalance that the government is now correcting
                                                                          through a series of reforms to modernize public administration and
                                                                          to improve the overall climate for business. Flagship initiatives in
                                                                          this area include a so called “regulatory guillotine”, Hitro.rez,
                                                                          which is simplifying business regulations. The government has also
                                                                          set up a new investment promotion agency, APIU, and a one-stop-
                                                                          shop ( for registering companies.
                                                                                The reforms are starting to create the desired results. “In 2003,
                                                                          we had one entrepreneur for every 30 able working citizens,” points
                                                                          out Branko Vukelic, Minister for Economy, Labor and Entrepre-
                                                                          neurship. “Today we have one entrepreneur for every 13.”
                                                                                In order to capitalize on the country’s strategic location,
                                                                          Croatia is also making a major effort to improve its physical infra-
                                                                          structure. Projects are underway to modernize highways and rail-
Sailors in the center of Zagreb                                           roads and to extend air links. The long coastline and a tradition in

                                              Raising the Barr
  T   he acquisition by Barr Pharmaceuticals, Inc. in October 2006
      of Pliva, the foremost pharmaceutical company in Eastern
  Europe, was the largest single foreign investment in Croatia and
                                                                               It was not just the prospect of a lower cost environment and
                                                                          tax breaks that attracted Barr to Pliva, but also the value of the
                                                                          company’s portfolio of generic pharmaceuticals and its R&D
  the largest investment by a US company anywhere in the region,          capabilities, particularly in the emerging segment of
  valuing Pliva at $2.5 billion. It created the third generic drug        biopharmaceuticals.
  company in the world, with combined annual revenues of around                In what Croatian politicians and business people hope may
  $2.4 billion.                                                           serve as a pattern for direct investments from the US and
       Barr acquired Pliva, which was listed on the Zagreb and            elsewhere, Zagreb now hosts the headquarters for the European
  London stock exchanges, after a dramatic bidding war with               operations of the combined company. Barr is moving
  Iceland’s Actavis. The transparent and open nature of the contest       manufacturing of some products to Croatia, benefiting from the
  increased the exposure of the country to international investors.       lower cost at local sites.
       Between the two of them, Blarr and Pliva now have over                  Bruce L. Downey, Barr's Chairman and Chief Executive
  120 generic and 25 proprietary products in the US, and more             Officer said in a statement that the Pliva acquisition “will offer us
  than 550 products globally. Pliva’s expertise in the European           increased market potential in the US and Europe, and expands
  market complements Barr’s presence in the US and 30 countries.          product opportunities by dramatically expanding human
  “I am very glad that Barr decided that their headquarters for           resources and physical infrastructure in a lower cost
  Europe will be in Zagreb, that the name of Pliva will still exist,      environment.”
  and that they are investing in a new research center here,” says             Potential foreign investors will be monitoring the results of
  Vice Prime Minister Polancec. “I really think that there is a lot of    the Pliva acquisition, and will now be closely watching the trail
  synergy between Barr and Pliva.”                                        that Barr has blazed in Croatia.
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                                                                                                                                     Corporate Croatia
               shipping mean that ports remain of strategic importance. The World
               Bank has loaned $156.6 million to modernize the deepwater port of
               Rijeka for both cargo and passenger transport. The port will have               Excerpts from
               two modern container and cargo terminals and a new passenger ter-
               minal. With rail links to Hungary also being modernized, the result-           an interview with
               ing growth in traffic should consolidate Rijeka as one of the leading
               ports serving the entire region of Central and Eastern Europe. New         Prime Minister Ivo Sanader
               terminals are also being built at the port of Ploce.
                    “Croatia is a transit country and will continue to be a transit             In office since December 2003 as leader
               country for many goods and services in the future,” says Bozidar
                                                                                               of the center-right HDZ, the Prime Minister
               Kalmeta, Minister of the Sea, Tourism, Transport and Development.
               “When you also consider the construction projects that we are plan-                   of Croatia talks about some of his

                                                                                                                                                                 Photo: Lider
               ning to undertake, then Croatia will be even more interesting.”                            administration’s priorities.
                    However, GDP growth rates of 4-5% are still below the aver-
               age for the region, and if the administration is to achieve its goal of
               raising the rates to 6%, it will have to be more aggressive about          How do you appreciate the
               reducing the state’s role in the economy. High levels of state aid,        changes in Croatia since you
               which prop up underperforming companies, are preventing the                took office?
               economy from hitting top gear. According to the European Com-              Today there is a new atmosphere of
               mission, the government spent around 2.8% of GDP in 2005 in sup-           dialogue, of tolerance. We are cre-
               porting state-owned sectors such as shipbuilding, steel, aluminum          ating a democratic society, which
               and railways.                                                              provides a platform for all other
                    The administration has said it plans to reduce the amount of          successes. I think that a lot of peo-
               state aid to 2.1% of GDP in 2007. In May, the World Bank said              ple, especially foreign investors,
               that since mid-2004 shares in over 841 companies had been sold or          are perceiving a difference. Croatia
               sterilized, while the public sector wage bill had been reduced by          now provides a very friendly busi-
               about one percentage point of GDP.                                         ness climate and atmosphere.
                    Furthermore, in a progress report from 2006, the European             What would you say to investors
               Commission says that “there is some evidence from available busi-          who are thinking about coming
               ness data that the private sector’s share in output has risen above        to Croatia?
               earlier estimates of 60%.”                                                 I would tell them we have very
                    Vice Prime Minister Damir Polancec, a high profile Croatian            skilled and open-minded people.
               businessman before joining the government, believes that more              Every single school in Croatia has
               needs to be done. “The private sector is becoming more and more            got its own web site and all stu-
                                                         powerful and more and            dents, starting with elementary
                                                         more important, but we           school, have their own e-mail
Photo: Lider

                                                         still have too much of our       address. Furthermore, we were
                                                         GDP coming from state-           one of the first countries in Europe to implement the so-called
                                                         owned companies. We              Bologna Declaration, the unified system of higher education
                                                         have to think about how          for all the European states. Croatia is a small to medium-sized
                                                         to speed-up privatization        country and in order to be competitive with the much stronger
                                                         because it is private capi-      economies of Europe we believe that our asset will be the
                                                         tal that will increase the       knowledge-based society.
                                                         competitiveness of those         What kind of investments is Croatia looking for from the
                                                         companies.”                      US?
                                                               As the state steps up      High technology and tourism. I think that high technology
                                                         its asset sales, there will be   could be one of the very interesting fields of cooperation.
                                                         major potential for over-        Another issue that would be of interest for us is to increase air
                                                         seas investors to buy into       links for Zagreb to become a hub for the region.
                                                         the Croatia turnaround           What can investors expect in terms of taxation?
                                                         story. Neven Jurica, Croa-       It is always an issue, in Croatia and elsewhere, whether one
                                                         tia’s Ambassador to the          should introduce a flat tax or not. I think we have a very good
                                                         US, points out that “the         tax system in place. We should just find a formula for good
               Vice Prime Minister Damir Polancec
                                                         US is the third investor in      marketing, to simplify the issue. [The flat tax system] seems
                                                         the Croatian economy. We         easier to calculate, but we do have a very friendly tax system
               are, however, expecting more incentives and further development.           for investors.
               We are looking at construction, ship-building and other industries         How do you see Croatia evolving in terms of the region in
               in which Americans could invest.”                                          a few years‘ time?
                    The balance of payments is also exerting increasing pressure for      First as a member of the European Union and NATO. Second-
               faster privatization and for more foreign capital. Croatia suffers         ly, GDP should grow to around 6%. We are aiming at not only
               from a high level of public debt, although the current government is       being the political leader of the region, but also an economic
               successfully cutting the budget deficit. “When this government took         leader. I would like to see more Croatian companies playing an
               responsibility for the country at the end of 2003, the budget deficit       important role in the region than is now the case. Pliva is one
               was 6.3%,” says Vice Prime Minister Polancec. “One of our most             such example: it is not only a regional player, but a global one.
               important goals at the beginning of our mandate was to decrease it
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               to below 3% by 2007. Last year the final achievement was under
               3%. These figures show where Croatia is today.” With this level of
               deficit, Croatia has already complied with one of the European
               Union’s criteria for joining the euro zone.
                     The classical way both to finance the current account deficit
               and to improve the competitiveness of Croatian exports is to
               attract more FDI to fulfill the economic potential of its human cap-
               ital and strategic positioning.
                     “It's a challenge for us to change the structure of foreign
               investment,” says Dr. Mladen Vedris, member of the National
               Competitiveness Council. “In the last 15 years, almost 80% of
               investment was brownfield. It's up to us to attract capital for
               greenfield investments, which will come with new technologies to
               be produced in Croatia for the region and even globally. We have
               excellent examples in the IT industry with IBM, Ericsson and
               Siemens. This is the way to attract wealth producers.”

               Signs of corporate Croatia appear anywhere from new buildings to

                    In the high-value industry of telecommunications equipment,
               Ericsson acquired a 49% stake in state-owned Nikola Tesla in
               1995. Ericsson Nikola Tesla has become the largest provider of
               telecom products and services in Central and Eastern Europe and
               a top exporter in Croatia. Over the years it has developed one of
               the strongest R&D centers for the entire Ericsson group and,
               reflecting the potential of Croatian know-how, last year about
               22% of Ericsson Nikola Tesla’s revenues came from sales to other
               parts of the group worldwide.
                    However, it is Croatia’s small and medium enterprises that
               will play the key role in raising economic growth to the 6% target.
               SMEs represent 99% of the total number of firms and 65.5% of
               total employment in Croatia, generating 55% of GDP and 25% of
               exports, according to the European Commission. The future eco-
               nomic growth of Croatia will be largely dependent on the expan-
               sion of these SMEs and on improvements to their competitiveness
               and productivity.
                    Michael Glazer of Auctor says that the Croatian private sector
               is now beginning to boom, partly thanks to the government’s eco-
               nomic and legal reforms. “SMEs are finally starting to grow the way
               they should have all along,” Glazer says. “The future of Croatia is
               going to be the same as the future of Slovenia, Northern Italy and
               Austria. And that means small and medium-sized businesses.”
                    The attractive combination of an easier regulatory environ-
               ment, a more modern infrastructure, a productive workforce and an
               open internal market should lead to a quantum leap in Croatia’s eco-
               nomic growth and competitiveness. The stakes are high, with a
               number of neighboring countries also vying for the title of invest-
               ment hub in the region, but Croatia’s pragmatic approach to its eco-
               nomic assets may just allow it to grab the role.
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                      The financial sector
                        comes of age



Roberto Motusic, Managing Director of the Zagreb Stock Exchange          viduals,” Horvat says. “There are two kinds of investors, the real
(ZSE), recalls that just a few years ago it was hard to convince the     ones and the speculative ones. Last year there was no difference.
heads of the largest companies in Croatia to come to the neglected       Today speculative investors have left, only a few are still here
exchange for even the simplest administrative procedures. “Some          managing high risks…There is no bubble.”
top companies never came to here to sign documents, to present               After the success of the massively oversubscribed IPO of oil
results,” Motusic says. “It was shameful.”                               company INA in December 2006, the government is now lining up
     A lot has changed since then. The ZSE has taken over its local
rival, moved into lavish new headquarters, and installed a state-of-
the-art trading platform supplied by OMX. Drug company Pliva
became part of Barr, after a bidding war that helped lift trading vol-
umes and share prices in the ZSE to record highs in 2006. Compa-
nies are now lining up to list shares and raise capital on the market.
     Croatia’s financial sector is regarded as the strongest in South-
eastern Europe, with most major banks now part of larger inter-
national groups, and the ZSE is emerging as the financing hub for
the region.
     In 2006, turnover at the ZSE almost doubled, with the blue
chip index, the Crobex, rising by over 60%. The rise in share
prices and volumes reflected fundamental changes, according to
Milan Horvat, President of the Management Board of FIMA,
Croatia’s largest equity brokers and asset managers. “As the
investors detected opportunities, a substantial supply of money
entered the market, both from investment funds and private indi-
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               the sale of its remaining shares of T-HT, “But when you see Croatia from NY, that’s
               the Croatian telecom and, in the longer when you can make a good evaluation. We
               term, power company HEP.                       also send expertise [to our partners] from
                     Michael Glazer, the American director here, to support their research and analysis
               of brokerage and financial advisory com- showing the opportunities in Croatia.”
               pany Auctor, says that although these huge           Participants in the capital markets say
               IPOs will help liquidity, it is lower profile that, in addition to more companies listing
               offerings that will dri-
               ve the development of
               the market: “Croatia
               suffers from a lack of
               heavily traded shares.
               It can only cure this
               by becoming an incu-
               bator for medium-
               sized local business.
               The ultimate source of
               income       on      the
               exchange is going to
               be medium-size enter-
               prises which will even-
               tually grow to larger-
               size enterprises. That
               sort of thing will carry
               the exchange into the
                     Horvat says that
               Croatian companies
               are now increasingly
               attracted by the possi-
               bility    of    raising Milan Horvat, President of the Management Board of FIMA
               finance in capital mar-
               kets, and says: “I expect an increased num- in the exchange to increase liquidity and
               ber of IPOs over the next few years. I also international exposure, more diversified
               expect an increase in corporate bond sources of capital are required. In order to
               issuance and further development of trading attract this capital, the trading platform pro-
               of such securities.”                           vided by OMX will also allow derivatives
                     Market participants say that Croatian trading from 2008.
               companies, which used to favor bank                  Motusic now wants US hedge funds to
               financing both because of regulatory advan- come in and help develop the market: “We
               tages enjoyed by the banks and because of need the venture capital to take risks, to roll
               some lack of transparency at companies, are the market and, of course, later on to exit.
               now turning to the capital markets as an And this is something the US investors can
               alternative source of financing.                do. They can really participate because they
                     “We already have information that have the know-how. I think investors in
               two or three bigger Croatian privately- Europe are more conservative than the ones
               owned companies want to go public, in the US.”
               because now they realize that the market is          As the banking sector matures, an
               here, that they can get proper valuation at increasingly varied and sophisticated range
               the capital market, that this market can of financial services is helping support the
               accept all volumes,” says Motusic. “Now is much needed expansion of private sector
               the time for the privately-owned companies investment in the country.
               to go public.”                                       “One of our pillars is the development
                     ZSE’s recent takeover of the Varazdin of the private sector culture,” says Bozo
               Stock Exchange (VSE) the second, smaller Prka, President of the Board of Croatia’s
               exchange in Croatia, has led to a more liq- largest financial group, PBZ, “and providing
               uid market, which is of greater appeal to funding, opportunities and advisory services
               international investors. US clients already to the growing SME sector.”
               account for 20-40% of FIMA’s trading vol-            PBZ is 76.6% owned by Italy’s Intesa
               ume, Horvat says, thanks to the role played Sanpaolo, which acquired its initial stake in
               by the brokerage’s partner in New York, 1999. The European Bank for Reconstruc-
               Auerbach Grayson. “You will see a lot of tion and Development (EBRD) has a stake
               Croatian managers who don’t understand of 20.8%. The bank runs over 200 branch-
               the quality of companies because they only es in Croatia, with assets of about $12 bil-
               have eyes for local issues,” says Horvat. lion, market share of around 19%, and
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                                                                                                                    Corporate Croatia
market capitalization of $5 billion. Group net profit rose 18.3%          perform many of the payment roles that were previously its
to the equivalent of $180 million in 2006, lifted by a boom in           domain, but FINA is still the market leader, with 35% of all
corporate and SME lending and by a consistently falling cost-to-         transactions.
income ratio, down to 50.96% in 2006 from 55.12% in 2002.                     However, Maksic explains that while FINA will continue to
     PBZ’s growth and profitability is in part a reflection of the         benefit from economies of scale in its transactions business, it is
solidity of the overall financial system. In October, 2006, in what       also expanding rapidly into other, higher value business areas. “We
can be seen as a vote of confidence not only for PBZ but also for the     will develop and offer services from the non-banking financial
entire system, Intesa Sanpaolo and the EBRD contributed the equiv-       industries like the insurance market,” Maksic says. “We will also
alent of $340 million in new equity, strengthening the capital base of   focus on investment funds. And outside of financial services, our
the bank and allowing for further growth.                                vision is to become the business intelligence leader in Croatia and
     The bank estimates that in 2006 total lending in the system         position ourselves as a rating agency.”
increased by 22.7%, compared to 20.3% in 2005. Loans to enter-                While Zagreb is well on the way to becoming a financial hub,
prises grew by 26.1%, the highest annual growth rate in nine             the major players in the system are also looking to expand outside
years. “Notably, enterprise lending grew faster than household           Croatia and into the Balkans. They can leverage the much greater
lending for the first time since 1995,” the Croatian National             solidity of their domestic market and provide more sophisticated
Bank says in its 2006 annual
     SMEs, particularly in the
tourism, real estate and con-
struction sectors, are driving
the growth of corporate lend-
ing. At PBZ, construction
loans rose by 49%, while at
Raiffeisen the credit risk expo-
sure to construction rose to
8% from 6% of the commer-
cial loan portfolio, according
to data from the banks’ 2006
annual reports.
     “The financial services
sector is the most competitive
sector in Croatia, especially
banking,” says Zoran Maksic,
President of the Board of the
state-owned Financial Agency
(FINA). “92% of Croatian
banks’ capital is owned by for-
eign banks, which has also
boosted market development.”
     “The competition proved
to be good for the clients,
because services such as loans
and other transaction-orient-
ed services became less expen-
sive,” Maksic adds. “Also,
management practices were
introduced by these foreign
owners that could only be
perceived as a new value in
our economy.”
     The massive change in the
workforce at PBZ illustrates
the extent to which foreign
capital has transformed and
modernized the Croatian
banking sector. Bozo Prka says
that “only 10-15% of the
workforce here previously
worked for the old state-
owned bank. It was a rebirth.”
     FINA also had a key
role in providing the founda-
tions of the Croatian finan-
cial system. Since 2002,
banks have been allowed to
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Corporate Croatia

                                                                                                                                               Photo: istockphoto/Frank Zierlein
                Projects in the pipeline


                                          WITH ENSURING A COMPETITIVE MARKET.

There have been dramatic movements in the energy and electricity         Croatia last year, and is planning to interconnect its gas pipeline
industries in Croatia in recent months: 17% of national oil compa-       with the Hungarian network.
ny INA was sold on the Zagreb Stock Exchange in December 2006,                 INA also has an ambitious investment program in order to
and as of the beginning of July, all businesses in the country, or 50%   increase the diversity and security of Croatia’s energy supply.
of the market, became free to choose their electricity supplier.         INA, in which the state has a 51% stake, will spend about $790
      For the moment liberalization is only on paper, as HEP             million in overall exploration and production between 2006-
remains the only electricity supplier and INA the sole producer          2010, $484 million of which will go to onshore and offshore
and importer of gas. But although the level of competition               developments in Croatia.
remains limited, the current priority for Croatia is to ensure a               Tomislav Dragicevic, President of the Management Board of
more diverse and secure supply of energy.                                INA, points out that there will also be developments in the
      Investments in the country’s electricity infrastructure need to    downstream industry: “We have embarked on a large-scale mod-
increase so that it can adapt to rising demand and support general       ernization program and it will involve huge investments in the
private investment in the economy. Further liberalization of the         next five years. About $1.1 billion will be invested in upgrading
sector should encourage a more competitive internal electricity and      refineries to improve the quality of our products and to meet
gas market, and provide more opportunities for private capital.          environmental requirements.”
      In the meantime, Croatia is working on diversifying supply               The focus of the company’s upstream investments is on
away from Russia, which currently accounts for 40% of its gas. A         increasing gas production from Syria and in particular from off-
planned liquid natural gas terminal (LNG), in which HEP and INA          shore fields in the Adriatic Sea, where production first started in
are partners, and new international projects from both oil pipeline      1999. A recognized world leader in the use of sophisticated EOR
operator Janaf (16% owned by INA) and gas pipeline operator              (Enhanced Oil Recovery) techniques, INA plans to extract more
Plinacro will attract new players to the market and help turn Croa-      oil from existing onshore fields both in Croatia and in other pro-
tia into a pivotal point on the continent’s energy map.                  duction areas.
      State-owned Plinacro, an INA subsidiary until 2002, built                In the first quarter of 2007, INA’s gas production from the
and put into operation 480 km of new gas pipelines within                Adriatic more than doubled year-on-year, with total hydrocarbon
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                                                                                                                                          Corporate Croatia
                         production up 19% to 67.7 mboe/day (million barrels of oil equiv-    energy. Pipelines from the Port of Rijeka would supply refineries in
                         alent). It has proven reserves of 261.1 mboe. In addition to the     neighboring countries such as Italy, Slovenia and Hungary. “With
                         Adriatic Sea and Syria, INA produces oil in Egypt and Angola, and    the LNG terminal in the Adriatic, the construction of the gas
                         it is also exploring in Namibia. “We expect growth in oil and gas    pipeline that will be connected to the markets in Central Europe
                         production of around 10% annually,” Dragicevic forecasts.            and the new oil pipeline route that should also go to Trieste, Croa-
                               Although INA is currently the only producer and importer       tia would become the energy hub for the region,” adds Dragicevic.
                         of gas in Croatia, new pipelines are planned to bring in other            These various pipeline projects will also be a key element in
                         suppliers of gas, and the construction of the LNG terminal will      increasing the supply of raw materials to the country’s expanding
                         also help to fulfill the aim of diversifying energy supply away       network of power plants. Croatia’s need for more electricity infra-
                         from Russian gas.                                                    structure is becoming acute, as economic growth picks up. “Our
                               “In the future, when the LNG terminal is constructed, we       calculations are that in the next decade the increase in consumption
                         can ensure access to natural gas from other producers in the         will be between 3.5% and 4% annually,” says HEP’s Mravak. “In
                         Mediterranean like Algeria, Qatar, Egypt,” Dragicevic says.
                               HEP and INA will be partners in the LNG terminal consor-
                         tium and in new gas pipeline projects. Ivan Mravak, President of
                         the Management Board of HEP, agrees with Dragicevic about
                         the potential impact of the planned pipelines and of the new ter-
                         minal. “Its capacity would be 10 to 15 billion cubic meters of
                         gas, which means that it would cover not only Croatia’s needs,
                         which are today at a level of 3 billion cubic meters, but much
                         more,” he says. Mravak adds that this would significantly cut
                         the dependence on Russian gas.

                         Multiple connections to the oil
                         and gas fields of Eastern Europe
                         and Central Asia, and the LNG
                         terminal providing access to
                         Mediterranean suppliers could
                         convert Croatia into an important
                         point for European energy.

                                                                                              Tomislav Dragicevic, President of the Management Board of INA

                                                                                              2006 we were at a level of 16.5 TWh of electric power consumption.
                                                                                              In 2020 we expect to be at the level of 27 TWh.”
                                                                                                   HEP has a 1.96 billion euro (approximately $2.66 billion)
Photo: Courtesy of INA

                                                                                              plan for new investments in power system facilities between
                                                                                              2006-2013, and the financing of this program will require joint
                                                                                              ventures with private capital. In the electricity market, an over-
                                                                                              head transmission line to Hungary and an underwater electricity
                                                                                              cable to Italy will also play key roles.
                                                                                                   The company currently has total installed capacity of over
                                                                                              4000 MW, of which about half is derived from hydro power
                              Plans are also underway to increase oil supply. The PEOP (Pan   plants. This proportion of hydroelectricity is one of the highest
                         European Oil Pipeline) project, which could cost $4 billion, would   in the world, providing Croatian industry and consumers with
                         transport up to 100 million tonnes of oil annually from the Caspi-   cheap, renewable power.
                         an Sea fields in Azerbaijan and Kazakhstan, via Romania and Ser-           INA is further along the road to private control, following
                         bia, to Croatia, where Janaf would then transport the oil over its   the acquisition in November 2003 by Hungarian oil company
                         pipelines to Italy and other Western European markets. PEOP          MOL of 25%. The Croatian War Veteran’s Fund has another
                         would be an alternative route to tankers passing through the con-    7%. The sale of a 17% stake on the Zagreb Stock Exchange in
                         gested Bosporus and Dardanelles straits.                             December 2006 will be followed by a sale of 7% to INA employ-
                              The multiple connections to the oil and gas fields of Eastern    ees this year, cutting the state’s holding to 44% from 51% now.
                         Europe and Central Asia, the existing oil terminal in Omisalj and    With the government planning to retain a 25% stake by the time
                         the LNG terminal providing access to Mediterranean suppliers         Croatia enters the EU, 19% will be available for sale, either to a
                         could convert Croatia into an important point for European           strategic partner or in a public offering.
                                                 SPECIAL ADVERTISING SECTION
Corporate Croatia
     Current global concerns revolve around energy security, oil             Germany’s RWE has a 50% stake in one of HEP’s power
prices, and climate change and Croatia is not the only country to       plants and private producers are allowed, but as of yet there
choose to maintain a key role for the state in this strategic sector.   have been no major new market entrants in the sector.
The state plans to hold onto a 51% stake in HEP after becoming               One new hydroelectric plant is being constructed and
                                                                        should be operational by the end of 2008 or early 2009, with a
                                                                        capacity of 40 MW. The bulk of HEP’s investment program of
                                                                        building an additional 1150 MW of capacity by 2013, according
                                                                        to Ivan Mravak, will be made up of gas-powered combined cycle
                                                                        plants. This largely explains HEP’s interest in securing a more
                                                                        diversified supply of gas in Croatia, from pipelines and from the
                                                                        LNG terminal.
                                                                             In addition, the Croatian government has also set a target of
                                                                        a 5.8% share of electricity to be produced by renewable sources
                                                                        in 2010, up from 0.8% in 2004. HEP established a renewable
                                                                        energy subsidiary in 2006. “We will install 400 MW from
                                                                        renewable sources by 2010,” says Mravak, “Of these, 320 MW
                                                                        will be wind farms, and 80 MW will come from using biomass,
                                                                        solar energy and geothermal energy.”
                                                                             In this area there will be a role for private capital to set up
                                                                        wind farms in joint ventures with HEP. Mravak adds there will
                                                                        also be opportunities for US companies to participate in the
                                                                        company’s investment program. USAID and the US Embassy
                                                                        have provided significant assistance to HEP, and the company

                                                                        There will be a role for private and
                                                                        foreign capital to set up wind farms
                                                                        and invest in renewable energy
                                                                        through joint ventures with HEP.

                                                                                                          has close ties with companies
                                                                                                          such as Parsons and GE, which
                                                                                                          have been successful at winning
                                                                                                          contracts in HEP tenders.
                                                                                                                The electricity market is cur-
                                                                                                          rently in the process of opening
                                                                                                          up, from 25% of the market in
                                                                                                          2006 when 116 eligible customers
                                                                                                          with consumption of over 9GWh
                                                                                                          were allowed to choose their sup-
                                                                                                          plier, to all 165,000 businesses, or
                                                                                                          50% of the market. Full market
                                                                                                          liberalization is expected from
                                                                                                          July 2008, when all two million
                                                                                                          households in Croatia will be free
                                                                                                          to choose a supplier.
                                                                                                                Mravak is optimistic about
                                                                                                          the outlook for HEP in a compet-
                                                                                                          itive market, noting the compa-
                                                                                                          ny’s recent financial performance
                                                                                                          in challenging circumstances: “In
                                                                                                          the last couple of years, by
Top left: Ivan Mravak, President of the Management Board of HEP;
Above, one of the company’s power stations outside Zagreb.              reducing operational costs and the number of employees, we
                                                                        managed to achieve a positive result in spite of the significant
an EU member. After the recent restructuring of the company,            growth of raw material prices.”
made to bring the electricity sector into line with EU legislation,          HEP is targeting net profit of over $134 million in 2012, up
it is subsidiaries of HEP, rather than completely separate compa-       from around $47 million in 2006 and a complete turnaround from
nies, that are responsible for running the electricity distribution     losses of about $109 million in 2003, reflecting HEP’s successful
and transmission systems. The subsidiaries have their own man-          preparation for a competitive market. Posting this sort of earnings
agement boards and prepare independent accounts.                        growth would clearly maximize its value in any partial privatiza-
      While competition may be slow to appear, that is not serving      tion. It would also be a reflection of rising economic growth and
as a brake either to investments across the industry or to the          demand in Croatia, and of the increasing modernization and effi-
process of diversifying supply.                                         ciency of the country’s overall energy infrastructure.
                                                 SPECIAL ADVERTISING SECTION
                                                                                                                    Corporate Croatia

                                                                                                     Creating added value at Duro Dakovic.

          Manufacturing ingenuity

                                    COMPETITIVE IN SPECIALIST NICHES.

The fountain pen, the common form of the electric light bulb and        Roncevic says, “but a smaller number of them have restructured,
the first self-propelled torpedo are all the result of Croatian manu-    adopted new technologies, and entered world markets as strong
facturing ingenuity.                                                    competitors. Some of the small, private companies that used to be
     However, the world has moved on from these items, and              workshops at the beginning of the war have reached a global level
Croatia is moving with it. Local industrialists accept that they can-   of quality for their products.”
not be competitive in mass-produced commodity products. The                  Sestan-Busch produces combat helmets for the German,
state-owned and private manufacturing sectors are now focused on        French, and Dutch armies, and is tendering for large US military
investing heavily in modernizing their production base in specialist    contracts, while small arms manufacturer HS Produkt produces
niches, and on actively looking for international partners and          the XD range of semi-automatic pistols sold by Springfield
strategic investors who can help them leverage Croatian know-           Armory in the US.
how and expertise in global markets.                                         The national defense industry also has a strong tradition in
     Recent economic data suggests that industrial sector growth is     heavy armor. Duro Dakovic Special Vehicles, one of the eight sub-
at a multi-year high, with manufacturing output up 10.3% in the         sidiary companies of holding Duro Dakovic, exported 149 of its
first quarter of 2007, according to the National Bank. Increased pro-    M84 Degman tanks, a modernised version of the Soviet T72, to
duction was recorded in almost all manufacturing sectors, while in      Kuwait before the Iraqi invasion in 1990. It is now negotiating
2006 exports of goods (excluding ships, oil, and refined petroleum       with Kuwait for the modernization of those vehicles and an order
products) rose by 15%, from 13.2% in 2005.                              for a new model of the Degman.
     In the defense industry, companies which increased their                Zdravko Stipetic, President of Duro Dakovic Holding, explains
expertise during the war of 1991-1995 have now carved out a role        how the company is now actively seeking to integrate some of its
for themselves in the global market. “Some of these companies           subsidiaries within larger companies, to make them more eco-
reduced their capacity after the war,” Defense Minister Berislav        nomically viable: in 2005, it sold its combine harvester business to
                                                 SPECIAL ADVERTISING SECTION
Corporate Croatia
Italian tractor giant Same Deutz-Fahr, which is now leveraging         and accounts for 50% of the holding company’s revenues. “We
Croatian know-how and skill to serve the important agricultural        want to ensure that this sale will guarantee adequate markets for
                                                                       the capacity of companies for which the Croatian market is not big
                                                                       enough,” Stipetic explains.
                                                                             The holding will use resources raised from the sale of these
                                                                       companies to invest in new sectors, and Stipetic says that potential
                                                                       joint venture partners are already lining up to create companies in
                                                                       innovation-based areas such as renewable energy.
                                                                             Since the end of the war, Duro Dakovic Special Vehicles, which
                                                                       provides 20% of the holding’s revenue, has focused increasingly on
                                                                       civilian industries, such as rolling stock for railroads. Bartol
                                                                       Jerkovic, President of the subsidiary, says that “it was difficult in the
                                                                       nineties to start again with the non-defense program. In 2003, 65%
                                                                       of the program was defense. Today, 75% is rolling stock.”
                                                                             The railroad business represents a major opportunity for Duro
                                                                       Dakovic Special Vehicles, with old rolling stock being replaced
                                                                       across Europe. But the company has had only limited success in
                                                                       placing its wagons in international markets.
                                                                             The current strategy of the company in this sector casts light on
                                                                       some of the challenges faced by Croatian manufacturing and by the
                                                                       wider economy: because of the relatively high costs compared to
                                                                       some neighboring countries, Croatian companies have to compete in
Zdravko Stipetic, President of Duro Dakovic Holding                    quality niche markets where they can add value and provide their
                                                                       customers with flexible, custom-made service.
market of Southeastern Europe. “The new owners recognized the                “There are companies in Poland, Slovakia, Romania, which are
quality of workmanship that we could offer, and they have made         huge. Definitely, this is why we decided not to compete in quantity,
our former company into their center of excellence for the whole       but in quality,” Jerkovic at Duro Dakovic Special Vehicles says. The
group,” says Stipetic.                                                 company is not aiming at the mass market, but at specific niches
     Duro Dakovic, which is 72% owned by the state, will apply         where it can differentiate more and be more competitive. “The
the same strategy to the largest of the eight companies in the hold-   idea is not to produce just any model of any wagon, in any coun-
ing: Montaza specializes in steel construction and bridge building,    try, in any quantity,” he explains.

                                                   SPECIAL ADVERTISING SECTION
                                                                                                                          Corporate Croatia
      Gredelj, a subsidiary of state-owned Croatian Railways, is fac-
ing similar challenges. Antun Fabek, Chairman of the Board of
Directors, says the company has not been able to compete in inter-
national tenders with market leaders such as Siemens and Bom-
bardier: “We are not in a position to fight against such large com-
panies. Instead, we need to find a market niche available to us.”
      Like Duro Dakovic Special Vehicles, Gredelj has found it hard
to export its products successfully by itself. In a consortium with
Koncar, Gredelj manufactures an attractive low-floor tram that is a
popular feature of the Zagreb cityscape. But despite interest from
cities across the world and a price that is lower than its rivals’, the
tram has so far been unable to steal share from global competitors.
Fabek says that in the European Union protectionism has been a
detrimental factor.
      Foreign partners help Croatian manufacturers access interna-
tional markets, invest in modernizing their production facilities,
integrate them in global groups with economies of scale in produc-
tion and in R&D. Gredelj has signed a cooperation agreement with
Siemens to market some products overseas. “I believe that, using the
Siemens’ sales and marketing network and their technical documen-
tation, we will be able to sell our products outside of Croatia and         Antun Fabek, Chairman of the Board of Directors of Gredelj
worldwide,” Fabek says.
      Gredelj is also looking for a strategic partner to help it partici-   has been significant interest from the US locomotive industry in part-
pate in the 2 billion euro ($2.7 billion) program for the moderniza-        nering with Gredelj, and his company has deliberately set space
tion of Croatia’s railroads and rolling stock.                              aside in its new premises, in case future production needs to be
      Fabek expects the privatization of Gredelj, within two years, to      increased for a foreign industrial partner.
include the sale of up to 49% to a strategic foreign investor.                   With the restructuring and modernization of Croatia’s state-
Although Croatian Railways will likely retain control of Gredelj,           controlled industrial companies now accelerating, and with privati-
Fabek expects high interest in the company, following the 80 million        zation leading to new opportunities, the Croatian manufacturing
euro ($109 million) investment that it has made in modern produc-           sector looks likely to attract a much higher level of foreign inter-
tion facilities outside the city center of Zagreb. He adds that there       est in coming years for products of homegrown innovation.

                                                   SPECIAL ADVERTISING SECTION
Corporate Croatia

                                                    Shipping News

 W      ith a coastline of nearly 6,000 kilometers, Croatia has a rich
        maritime tradition and is the world’s sixth largest shipbuilding
 country, with a 1.3% share of the global market.
                                                                           currently expanding rapidly, with seven vessels under construction,
                                                                           three in a local shipyard and four in China.
                                                                                Tankerska plovidba leases out crewed vessels across the
                                                      Although the         world, and has a working relationship with Exxon Mobil and major
                                                 shipbuilding industry     charters in the US. “The current situation in the shipping industry is
                                                 in Croatia is largely     very good,” says company President Capt. Ive Mustac. “The
                                                 being kept alive by       market is high, especially for tankers. It has been growing for three
                                                 state subsidies, the      years now and the period of growth is continuing unexpectedly.”
                                                 government has a               Mustac is unconcerned about any challenges EU accession
                                                 program to restructure    might bring. A maritime law passed in Croatia last year put
                                                 the industry and, in      shipping on a par with countries in the Union. “My company has
                                                 the meantime, private     the same rules and regulations as a company in the EU,” says
                                                 operators are             Mustac. “Technologically, they have nothing that I don’t.”
                                                 accelerating the               Mustac attributes much of the company’s global success to
                                                 modernization of the      the skill of the workforce: the company’s crew comes from its
                                                 sector.                   hometown, the ancient port city of Zadar, and employees tend to
                                                      Earlier this year,   stay with the company throughout their careers, compared to a
                                                 Tankerska plovidba        sector average of four years.
                                                 and Uljanik, the best          The ownership of the company also illustrates the benefits of
 Capt. Ive Mustac, President of Tankerska        performing state-         Croatian maritime industries moving away from the state. In a free
                                                owned shipyard,            market version of socialism, 85% of Tankerska is owned by a trust
 acquired 60.4% of the bankrupt Viktor Lenac shipyard. The two new         in which employees are partners, sharing in the profits. “These
 owners will invest significantly in its modernization.                     people are employees, but it is their company also,” says Mustac.
       Tankerska’s track record is testimony to the potential of the       If applied elsewhere in the sector, this combination of private
 maritime sector in Croatia when it is under private control. The bulk     ownership and high quality labor should ensure good prospects for
 carrier and tanker operator has 16 vessels, half of them tankers. It is   the competitiveness of the Croatian shipping industry.
                                                  SPECIAL ADVERTISING SECTION

                           A place in the sun

Although at the time of the former Yugoslavia the Adriatic coast was        nature and an increasingly cosmopolitan lifestyle. The government
a popular destination for low cost vacations for northern Euro-             has made a range of incentives available, such as inexpensive cred-
peans, the name of Croatia itself only became familiar internation-         it lines to support private investors in the sector and to encourage
ally after independence. Nowadays, the country is atracting a more          greenfield investments in traditional coastal areas and elsewhere. In
varied inflow of visitors than perhaps it ever expected.                     March, 2006 it adopted a program of support for the tourism sec-
      The question asked in the Croatian tourism industry today is          tor, which includes a working group that is preparing the privatiza-
“where to now?” Having come this far, there is a general feeling that       tion of some remaining state-owned companies.
the current business model needs refreshing. While the country is                 “The task ahead of us is to complete the process of privatiza-
targeting 12 million foreign tourists by 2012, the real focus of the        tion,” says Bozidar Kalmeta, Minister of the Sea, Tourism, Trans-
country’s present tourism strategy is less about volume and num-            port and Development. “There are 17 hotels that still haven’t been
bers, and more about facing up to sophisticated challenges: attract-        privatized, and the completion of this process is a priority. It would
ing higher quality, higher spending tourists, extending the season          be interesting for American investors to participate in the offers in
from its current three months, and strengthening niches such as sail-       this sector.”
ing, diving, business, cultural and health tourism.                               The lack of availability of high quality accommodation has
      “People do not like just to sit in the sun next to the sea anymore    become a limiting factor to growth in tourist numbers and earnings.
– they demand more activity, more entertainment,” says Tonci                Croatia is now reacting to this problem: older hotels are being ren-
Peovic, Director General of Dubrovnik Airport. “This is what Croa-          ovated to increase their quality, and new hotels are being construct-
tia does not offer yet.”                                                    ed, led by a $88 million investment in the five-star Le Meridien
      In spite of the diversification of the local tourism industry, there   Grand Hotel Lav in Split.
is little doubt that the medieval walled city of Dubrovnik, a                     “Where we lag behind a little bit is in the quality of accommo-
UNESCO World Heritage Site and the self-proclaimed “Pearl of the            dation,” Kalmeta agrees. “We lack the five-star hotels, but we are in
Adriatic”, will remain the leading attraction of the country.               a better position in this respect year by year. Investments in the
      However, there will be extensive opportunities for foreign            tourism sector are very large indeed, especially private investments.
investors to contribute to the changing face of Croatian tourism, not       We are starting to have more and more luxury accommodation.”
only in Dubrovnik, but also across a country that boasts history,                 The appearance of exclusive boutique hotels in places such

                                                 SPECIAL ADVERTISING SECTION
Corporate Croatia
as the island of Hvar that cater to an international mix of jet set-
ters is part of a new trend that might catch on when the full
potential of the country’s different destinations is fully realized
and properly marketed.
     In the meantime, the process of finding new markets to com-
plement traditional tourism seems to be taking hold, with Boeing
747s chartered to land in Dubrovnik from Japan this summer. Nei-
ther is Croatia neglecting its core markets: in 2006, several new low
cost carrier routes to resort towns have been announced.
     US visitor numbers are also rising fast: “The potential is big,”
says Marko Vojkovic, President of, a large online
tourism agency and tour operator. “Last year we had 144,000
Americans in Croatia, representing a 33% growth.”
     Vojkovic adds that, apart from some cruise ships in Dubrovnik,
US tourism is still small because major tour operators in the US are
not offering Croatian products. His agency wants to bring American
tourists over for longer visits.
     “We see this as a major goal for us – to be able to bring the
volume and to have direct flights from New York and other parts
of the US,” Vojkovic says. “We provide the product and we will
                                                                        Dubrovnik remains a major attraction for tourists.
try to find a partner to share part of the risk and to set up the
charter flights. We need, of course, a tour operator in the US that
can bring volume in sales.”                                             ber of visiting ships in Croatia rose by 24%, with passenger num-
     Within three years aims to post 1 billion euros      bers up 17%. About 80% of these passengers visit Dubrovnik only.
($1.36 billion) in annual revenue and serve three million passen-             Sailing tourism already accounts for 10% of the country’s
gers per year, ahead of a possible public listing.                      total earnings from the industry, with over 150 charter companies,
     The trend for shorter stays is also adding to the pressure to      54 marinas and 15,188 water berths for boats. Major investments
increase direct flights to the country. Long-haul charter tourists       are being made in this segment: over the next ten years, 15,000
will stay longer and spend more than northern Europeans on city         new boat berths will be built and new marinas will be construct-
or beach breaks. Peovic of Dubrovnik Airport is talking with            ed. Most of the development, however, will go towards improving
Delta, USAir and Continental about direct flights arriving from          existing marinas, in order to minimize damage to the pristine coast
the US for the first time since 1978. The modernization of the air-      that is the main attraction for yachting.
port, to be completed by 2011, will give it the ability to handle             The tagline of the Croatian Tourist Board, “The Mediterranean
5,000 people in peak hours. Peovic expects about 2 million annu-        as it once was” shows that it has learned from the mistakes that top
al visitors from then on.                                               destinations such as Spain and Greece made in the 60s and 70s. To
     “As travel costs are so reduced, we can offer a similar package    attract more affluent tourists interested in niche markets, the coun-
to long distance travelers as we can to Europeans,” Peovic              try needs to balance the growth of accommodation and attractions
explains. “This is why we are carrying out so many actions to           with a judicious preservation of its natural and cultural assets.
attract long-haul carriers. Our task is to tap into far markets and
establish several connections.”
     Dubrovnik is also taking an increasing share of the booming          MARKETING: A. Roberts - PRODUCED BY: K. De Lacy - C. Moura - RESEARCH: S. Augustin
                                                                                    TEXT: M. Beresford - DESIGN: M.Fuoco - PHOTOS: M. Zambrana
global cruise industry. In the first eleven months of 2006, the num-


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